On a serious note, it would be a good idea if, say, Congressman Ron Paul were to investigate the role of Sovereign Wealth Funds in US Hedge Funds, related to the crash or their current activities today. These are not normal institutional investors. While SWFs do not set out to lose money, a Hugo Chavez, for example, makes investments with a different kind of strategic calculus than does Warren Buffet. Putting SWF dollars in Hedge Funds renders their investment decisions secret, or at least very opaque, behind the face of an American hedge fund manager. Investments that some of the SWF countries might not be allowed to make here directly and openly in specific corporations or industries for very good diplomatic and national security reasons.
Who is watching the store?
Is there even a story here beyond “Hey wait, does the rest of the world short-sell and speculate on commodities like we do? No fair.”
I really don’t buy the whole “financial terrorism” bit because it seems to rely on the premise that someone can understand the state of entire financial system at one time with enough accuracy and precision to steer it in anyone direction.
Most likely you might find people hostile to America all independently allowing their ideological viewpoint persuade them that this time America is “going to get what it deserves.”
In short, if you think a company is on the wrong track your much more likely to short it. Stands to reason people short nations for the same reasons.
People blamed short-sellers for the 1929 crash too. It was a poor argument then and it’s no better now. No matter how much money you have, if you sell down a market that’s otherwise sound you are doing nothing more than transferring your money to the bargain hunters who buy shares from you. Then the market rebounds when you stop selling. Remember the spike sell-off in stocks last Spring? The markets rebounded almost instantaneously and people who sold on the way down lost a lot of money.
The real cause of the 2008 crash was three decades of housing-market mispricing caused by bad govt policies. Goldman et al exploited the opportunities and probably benefited from corrupt deals with the Administration and the Fed but didn’t cause the problem. Congress did. The simpler explanation should be preferred.
The guy in the article, according to Shlok Vaidya who was in the think tank sector at that time, is something of a flake. I would not take his specific accusations too seriously.
That said, SWF are not normal market actors like, say, insurance conglomerates. Most of them are run by authoritarian and often unfriendly governments. China alone has a sizable number of them. The potential security concern is not their selling short like everyone else during a panic. The problem they present is a) the acquisition of undue influence over the USG by concentrating on getting control or manipulating corporations critical to the US economy, and through them American policy during a crisis. I am not sure I would be too comfortable if Chinese SWF had multiple seats on Google’s board of directors via hedge funds or other cut-outs, for example. And b)access to proprietary technological information of great military or economic value
I agree that it would be good to prevent foreign govts from gaining undue influence over our critical industries. The problem lies in defining “undue influence” and “critical industry”, and then in figuring out what to do about it. The cure quickly becomes worse than the disease if Congress follows the likely course and turns this into another antitrust/protectionist program, i.e., a means by which big companies use the govt to suppress competitors.
It would also be very difficult to control the US activities of foreign sovereign funds without making our investment environment even less welcome to foreign capital than it already is. How do you find the source of investment capital? It’s easy to hide if someone wants to, and there are plenty of legitimate reasons for hiding such information. At some point companies start to list themselves overseas or set up offshore subsidiaries to avoid intrusive US regulation.
Most of what foreign SWF do is seek the highest risk-adjusted returns for their investors, often ultimately retirees. We should be able to deal with espionage and subversion attempts without discouraging capital investment in general.
There was a now largely forgotten flurry of panic over German ownership of American economic assets during 1941. In the end it didn’t mean much. The companies where of course largely run by Americans and when Germany declared war, the companies where simply reformed as American owned companies. After the war, some were then just reverted to German ownership.
“Owning” a large economic asset like a company doesn’t mean controlling it to the point of destruction. People forget that corporations a analogous to living things in that they require a constant flow of revenue to stay alive. In turn, that flow of revenue is dictated by the free-market. So, in the end, sovereign “owners” of US companies don’t have anymore control over the company than do American owners. They just have to ride the wild rapids of the free-market like everyone else.
Also, buying an asset just to destroy it is very expensive. Even a mid-sized company is often worth tens or even hundreds of millions of dollars. Even if you do destroy a company its competitors will be glad to replace its function in the market.
The free-market is so powerful that it frustrates all attempts to control it except those of the local sovereign force-monopoly. You have to able to physically hold a gun to someone’s head to really control a major economic asset.
Shannon,
I think you ought to take a harder look at China before you quickly write off the “whole financial terrorism bit”. Anyone who thinks free-market forces are at play in their economic strategy would have to be quite naive.
Bill Waddell,
I think China will pursue their own interest and they are clearly willing to use things like their purchasing power of treasuries for all the political leverage they can. Buying treasuries is relatively simple and something the Chinese do and therefore is something they can precisely control. Plus, the effects are largely political, not economic.
I just don’t think it is really practically possible to do things like drive down markets by shorting or destroying companies from within. Both simply require to much money to pull off.
I find the idea of large scale economic warfare intriguing but I think it is really just another form of central planning and like all central planning fails because central planers can never acquire enough real-time information about the state of the economy at anyone time to actually plan. In short, the effects of any coordinated, large scale economic “attack” are impossible to predict and are just as likely to end up benefiting the targeted economy or assets as hurting it.
Besides, despite all the hoopla, the Chinese economy simply isn’t that big in the grand scheme of things. It has GDP about the same as Texas or France. They just don’t have the umph needed to accomplish anything significant.
Shannon,
I agree that China’s economy is in trouble and I doubt they can sustain much longer before they implode from both economic and social pressures. They have, however, succeeded in wreaking enormous damage upon our manufacturing and technology base. I am also disappointed that so few people appreciate that China’s economic strategy is merely an extension of their political agaenda, and while reasonable people can disagree as to exactly what China’s end goals are, they are not our friend and their designs are to cause us harm. How much harm they want to cause, and how much harm they can cause, are unknown, but anyone who thinks China is a free enterprise force and that we are experiencing some perfectly reasonable Ricardian Comprative Advantage boom from Cina’s innocent desire to enhance the economic well being of its citzenry does not know China well at all.
Bill Waddell,
Well, I agree that China never does anything without a greater political context. That is because they are (1) communist and (2) Chinese and the governments of China have always followed some greater centralized plan.
They have, however, succeeded in wreaking enormous damage upon our manufacturing and technology base.
Actually, I don’t think they have. I think most of our damage in that case has been self-inflicted. We simply priced ourselves out of many manufacturing markets with unions, labor laws, overregulation and environmental hysterics. If it wasn’t the Chinese, it would be someone else.
60% of this planets people are dirt poor and quite willing and able to work long hours at dull jobs. The Chinese have just proven the most capable at organizing those people but they certainly don’t have a lock. We just have to adapt to that.
The other truth is that there are a lot of jobs in manufacturing that simply can no longer support a middle-class American lifestyle. Just because sewing T-shirts was a lower-middle class job 50+ years ago doesn’t mean it is now. No matter how high of tariffs you set or how strong the unions, you can’t generate enough wealth screwing together Happy Meal toys to let an American live beyond the poverty line.
The sad truth is that for big part of America’s manufacturing sector including associated unions and political culture, are still stuck in the 20 years after WWII when they had no competition. They simply refuse to adapt to a world overflowing with competition.
Anything the Chinese are doing is simply accelerating by a few years long established trends. In the end, on the national scale, China’s plans and manipulations simply aren’t that big of a problem. I think its a big error to focus on Chinese behavior as a cause when it is really just a symptom.